Social Reality's (SCRI) CEO Christopher Miglino on Q1 2016 Results - Earnings Call Transcript

| About: Social Reality (SRAX)

Social Reality Inc. (SCRI) Q1 2016 Earnings Conference Call May 16, 2016 4:15 PM ET

Executives

Robert Haag - Managing Director at IRTH Communications

Christopher Miglino - Chief Executive Officer

Rahul Thumati - Chief Financial Officer

Analysts

Kevin Dede - Rodman and Renshaw

Operator

Greetings and welcome to the Social Reality’s 2016 First Quarter Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce Robert Haag, Managing Director at IRTH Communications. Thank you Mr. Haag, you may begin.

Robert Haag

Good afternoon everyone. I’d like to welcome all of you to Social Reality’s first quarter 2015 conference call. With us today are Social Reality’s Chief Executive Officer, Christopher Miglino; and Chief Financial Officer, Rahul Thumati.

Before I turn the call over to management, I would like to remind you that in this call, management’s prepared remarks contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements during the question and answer session. These forward-looking statements are subject to risks and uncertainties and actual results may differ materially.

When used in this call, the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project, and similar expressions as they relate to Social Reality, Inc., are, as such, a forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties, which may cause actual results to differ from those anticipated by Social Reality at this time.

In addition, other risks are more fully described in Social Reality's public filings with the U.S. Securities and Exchange Commission, which can be reviewed at sec.gov. Finally, please note that on today’s call management will refer to certain non-GAAP financial measures in which Social Reality excludes certain expenses from its GAAP financial results. Please refer to Social Reality's 2016 10-Q for a full reconciliation of its non-GAAP performance measures to the most comparable GAAP financial measures.

Earlier today, May 16, the company filed its 10-Q with the SEC and afterwards issued a press release announcing its financial results. So participants in this call who may have not done so already, may wish to look at those documents as they provide summary of the results on this call.

I would like to now turn the call over to Social Reality’s CEO, Christopher Miglino, who will give an overview of the company’s business activities and developments for the first quarter and of 2016. He will then turn the call over to Rahul Thumati who will provide an overview of the company’s operating and financial metrics. We will then open the call for Q&A. Christopher?

Christopher Miglino

Thank you very much Robert. Hi everyone and thank you for joining the call today. We’re extremely pleased by the results we’ve generated this quarter and believe this is a strong start to the year. Despite seasonality within our industry, which typically sees lower first quarter revenues we’re excited to report revenues of $5.5 million, which represents double-digit year-over-year growth of 36% in comparison to the first quarter of 2015.

We attribute much of this to the strength of our business and the growth of our technology platforms across multiple revenue streams. On this call, I’d like to highlight a few key factors that are driving the increase in revenue. These are factors that make us unique from the market and provide us with a leading competitive advantage over other players in this space.

They are the growth of the infrastructure of the company, our digital platform offerings, and our management team. First, infrastructure growth. In 2015, we spent our resources in expanding the infrastructure for our business and investing in necessary resources to keep pace with the rapid growth that we’re experiencing. These resources complement our core services across all digital platforms, so it may provide unique tools in improving advertising performance for our clients.

It was important for us to add the infrastructure that expands on our strengths and further increases our footprint within the industry. Within our digital platform offerings what allows us to differentiate ourselves from the many point platform providers in the market is our offering as a solutions platform that is providing the tools that brand marketers and content owners need to be more effective in the competitive digital advertising space.

This allows us to provide an all-encompassing marketing services platform for our clients. Thus far we have been able to successfully achieve superior performance from our proprietary suite of products, which includes our solution platforms from programmatic buyers and sellers, our pharma targeted advertising platforms and social media platform for brands and publishers.

Our customer base consists of long-term clients who see the value in what we provide and we have been able to diversify that into new customer counts as well. For those of you that are new to our story, it’s important to reiterate our core technology as it solidifies our position amongst the competitors.

Our three revenue sources include SRAX, our programmatic solution platform for both marketers and content owners. SRAX is our core engine that drives value for of four clients in providing the tools needed to effectively buy and sell in the programmatic space.

Our SRAX MD product is our second offering, which is a healthcare focused programmatic platform that utilizes the SRAX solution platform mentioned and allows pharma brands to reach health care professionals. We've built a significant database of different types of healthcare professionals and help our clients reach those professionals across many different platforms at a number of locations.

The third is our strike SRAX Social platform, which is a social media platform and complete management tool that allows brands to launch distribute track and optimize social and digital media and consumer engagement campaigns. Our tools help brands identify who their true influences are and then identifies the key characteristics of these consumers.

We’re then able to build models against this first party data that can be used in what we call our real-time social programmatic buying feature of our SRAX engine. Our management team, during the first quarter of this year we've made further investments in our corporate leadership team with the appointment of our Chief Financial Officer, Rahul Thumati, who will be speaking on the financials in just a short while.

Rahul joins us from Liberman Broadcasting, the largest privately held and minority owned Spanish Media Company in the country with nearly $140 million in annual revenues. He’s held a variety of executive finance positions and here at Social Reality will provide our analyst community with more insights into the financial performance of the company, as well as overseeing financial reporting of investor relations and capital and financing strategies.

Going forward, our entire team has been working diligently to establish the company as a leader in the solution platform market. From traditional banner advertising to mobile video and native and social media our SRAX engine provides solutions that help brands and publishers maximize returns on their digital assets.

Our offering provides advertisers a consolidated platform, customer loyalty applications, cross-platform programs, media buying analysis and more. For publishers we offer increased revenue yield, a single platform to manage ads, access to real-time bidding buyers, retargeting capabilities, and content optimization.

We strongly believe that this is a great time to be in the digital advertising space as it’s still in its infancy, an already a multi-billion dollar market. We also believe that social reality is well positioned to capture a growing portion of this spending, due to the current size of the programmatic space and social media markets, as well as the expected continuation of rapid growth in the digital media space.

As many of you know, last year we provided guidance of $30 million for the year and exceeded that at the end of last year. We’re continuing to see expansion in our different business units and as a result, we remain committed to driving strong levels of growth and are providing revenue guidance at $40 million for the full year of 2016. That will be a 33% increase over our 2015 revenue.

I’d now like to turn the call over to our new Chief Financial Officer, Rahul Thumati who will be providing an update on our financial performance. Rahul?

Rahul Thumati

Thanks Chris. I would like to now turn our focus on to the first quarter 2016 financial summary. We reported 36% year-over-year revenue growth for the first quarter 2016 with revenues of almost $5.5 million, as compared to approximately $4 million to the first quarter of 2015. Specifically, we are encouraged by 44% increase in active customers during the three months ended March 31, 2016, compared to the same period last year.

Gross profit increased to $2.3 million for the three months ended March 31, 2016, compared to $1.8 million for the same period in 2015. Gross margin for the quarter ended March 31, 2016 was 41.8%, as compared to 44.2% for the same period in 2015. For the first quarter ended March 31, 2016, we reported operating loss of $1.5 million, representing a 34% increase over the first quarter of 2015 in which we reported a loss of $1.1 million.

For the quarter ended March 31, 2016, our adjusted EBITDA was $980,000 loss, compared to a loss of $700,000 in the first quarter of 2015. The decrease in the adjusted EBITDA loss was due to an increase in operating expenses, which is comprised of increased employee headcount, employee related expense including salaries, commissions, marketing and general override expenses.

Operating expense increased to 30.8% for the first quarter of 2016 from the comparable period in 2015. We expect that our operating expense will continue to increase in future quarters commensurate with the expected growth of our business. We reported a net loss of $2.4 million or $0.08 per share for the three months ended March 31, 2016 compared to a net loss of $2 million or $0.08 per share for the corresponding period of 2015.

Our cash and cash equivalents totaled $1.6 million at March 31, 2016, current assets and total assets were $6.9 million and $25 million respectively and current liabilities and total liabilities were $12.1 million and $20.4 million, respectively. At March 31, 2016 the company had stockholders equity of approximately 4.7 million. As mentioned earlier, we are providing 2016 full-year revenue guidance of $40 million. This is taking into account organic growth as we diversify across our lines of revenue and does not contemplate future acquisitions.

We would now like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Kevin Dede with Rodman and Renshaw. Please proceed with your question.

Kevin Dede

Hi thanks good afternoon gentlemen. And congratulations for Rahul on the new position. I think it's a very exciting opportunity for you.

Rahul Thumati

Well thank you Kevin. I appreciate it. I am looking forward to kind of growing with this business and all the good things coming with it.

Kevin Dede

So, apologies, but you made a comment regarding the 44% something or other at the very beginning of your prepared remarks and I missed it. I know it wasn’t a reference to gross margin but…

Rahul Thumati

Oh, it was regarding our active customers, yes. We had a 44% increase in active customers this quarter compared to the same period in 2015.

Kevin Dede

Any idea on how that number may have changed from the December quarter?

Rahul Thumati

From the December quarter - I can provide that information off-line, I don't have it in front of me right now, but I can get that for you.

Kevin Dede

Okay. Chris, could you just, I mean peel the onion back a little bit on seasonality? I was thinking things might be a little bit stronger, I mean still a nice job, but I am just, as a little surprised because I guess I hadn't expected as much seasonality as seems to have appeared? So, I was just hoping you might just kind of discuss what some of the major factors are there visa-a-vise your customers and the general business environment?

Christopher Miglino

Yes, we see the - hi Kevin, how are you?

Kevin Dede

I’m great. Thank you for taking the questions.

Christopher Miglino

Great, thank you. We see the things fall of the cliff from the beginning of January going into the third week in January and then start picking up again after that it’s been consistent like that year-after-year. So there definitely is a seasonality that happens, but even with that we are seeing an increase in the - 36% increase in the revenue side. We think that that’s a pretty strong start-off for the year and that-s why we - and based on what we're seeing, we are comfortable giving the $40 million guidance for the entire year this year. And as we go throughout the year we’ll continue to revisit that guidance as the strength continues within the market. But there is definitely a seasonality that happens within this business for most players.

Kevin Dede

Okay. Is it, I guess it’s clear cut across the board, I was just wondering if maybe it was a little bit stronger with one particular customer group or another sell side or buy side, is it just kind of there it is?

Christopher Miglino

What happens is, the buyers slowdown, so the CPM's drop. So that affects both the buy side and the sell side. So the sell side starts to experience lower CPM and lower fill rates. And then on the buy side there is just not as much demand that we have at the beginning of the year. But that comes back into full force towards the end of mid-to-end of February and then throughout the rest of the year and we’re seeing that now and hopefully we’ll see that through the rest of the year.

Kevin Dede

Okay since sort of the end of February you’ve been pretty much back to your regular growth trajectory I mean given that’s a couple of months?

Christopher Miglino

Yes, we are very excited about seeing the diversification of the revenue. So we're starting to see more customers coming to the fray or different business units that we've spent a lot of time and energy building around or starting to deliver significant revenues. Whereas social and pharma in previous years had not been as significant as they are now and we’re starting to see those segments really kick in and contribute to the overall revenue stream.

Kevin Dede

Well I’m glad you mentioned that because I was going to ask about that. Are you prepared to segment revenues at all across the three platforms that you’re offering or is it still a little bit too early for that?

Christopher Miglino

I think it’s a little too early for that. We want to get there but we are just being cautious about that and obviously Rahul has stepped in and is going to start providing more and more tidbits of information as we go like, you know the increase in the number of customers was kind of our first step in getting there, but having only been on the job here for a few months I think we got to give Rahul a little bit of time to determine how he wants to do that and pick the numbers that he wants to focus on with the analyst community, and I think you guys will be happy at the end of the day. We want to give us much insight as possible without - it's a very competitive market and we want to be cautious about our competitors having insight into our gross profit numbers and just where the revenue is coming from.

Kevin Dede

Fair enough. Thanks Chris. Rahul one last question for you please. You mentioned operating expenses increasing commensurate with revenue and I was wondering if you could just talked about a little bit, I mean I would think that you would be able to leverage some of the fixed costs you have in hearing those, but obviously that’s a function of how much investment you are planning on making. So, could you just kind of talk to that a little bit?

Rahul Thumati

Sure. From an investment perspective, we are really focusing on growing out our marketing sales and with that comes some added expense. From a basic general overhead perspective, we maintain cost discipline, but over the next quarter to two you will see that investment on the sales front and that’s where our biggest focus is.

Kevin Dede

Okay. Fair enough. I’ll hop back in the queue. Thanks very much gentlemen.

Christopher Miglino

Thank you, Kevin. Really appreciate it.

Operator

[Operator Instructions] Our next question is a follow-up question from Kevin Dede from Rodman and Renshaw. Please proceed with your question.

Kevin Dede

Thanks very much operator. Yeah, it’s Kevin Dede. Sorry Chris, it’s just me I guess for now.

Christopher Miglino

No problem.

Kevin Dede

This is very, very exciting business and things are changing very quickly, I was hoping you might just offer your perspective on the evolution of the sell side, the buy side and the progression to sort of geo-fencing and its incorporation and mobile and how you are managing the growth of your business to absorb new technology as it comes into play? You can sort of take it any way you want, I wanted to just sort of keep it open ended so you could focus on how you see things progressing and what you’re doing to position Social Reality to address them.

Christopher Miglino

It is a great question and if you will notice our languaging around solutions platform and one of the reasons that we position ourselves as a solutions platform instead of a point platform like some of our competitors is that we’re building the tools that are necessary for specific brand marketers to achieve their KPI’s, and we’re working with those brand marketers to accomplish that, and what that means from a platform perspective is that we need to be available and ready for all of the new and evolving technologies that are out there that are best of breed to integrate into our platform. So, we’ve created an open environment that allows us to - in just platforms that are doing geo-fencing or platforms that are doing video, or platforms that are doing native advertising into our solution and then provide that out to our advertisers. So, we don’t try to be the best at everything, but what we try to do is integrate all of those tools into one single platform that makes it easier for our brand marketers to measure the effectiveness of all of their media campaigns across all of their different buys that they may have.

Kevin Dede

Okay, that’s fabulous, thanks for that. Could you dive in a little bit deeper and speak to the emerging technology, you mentioned a few geo-fencing video native ads, can you address the ones that you feel - your platform is now delivering at very competitive level versus others that you think are emerging that you might need to address?

Christopher Miglino

So, ours is, we’ve integrated partners across all of those different categories and our platform is measuring the effectiveness of all of those different sellers of inventory. So there may be a best of a breed mobile seller, best of breed video seller, and best of breed native seller that are all integrated into our platform. A buyer can buy and can measure the effectiveness of all three of those. Here we are seeing a lot more money flow into native, a lot more money flowing into social, and a lot more money flowing into the mobile side, mobile is very big and things are shifting very quickly over to the mobile side.

Kevin Dede

Okay. Will you consider talking to the segmentation of your business on sort of a fixed versus mobile platform or is it, I mean I’m sure you can tell, I’m just wondering if that type of competitive information might not be something you’d want to share?

Christopher Miglino

Yeah, so we’re - I don’t think we would break out the differences between mobile desktop or native, but we would breakout the potentially the business units for you guys to understand and give you some metrics around each business unit so you can see and put some metrics around the growth of each of those business segments.

Kevin Dede

Okay. On the financial side, could you speak a little bit to your expectations on cash needs and cash usage? I mean I understand that there is a pretty sizeable pool of warrants out there, I’m just wondering how you are seeing that reflect in your cash expectation.

Christopher Miglino

Yeah, so, as you know there is some options or warrants that expire in the next few months here that represents another, I would say $2.5 million for the company, so that, in the short term if all of those are exercising there, those are all well within the money than we would see some additional capital into the company. Ultimately our goal is to re-finance out of the existing debt that we have right now or in the future restructure with our partner. Victory Park has been a fantastic partner for us. So, there is, you know we seem to be okay now in the short-term, but I think towards the third quarter of this year we will be contemplating what to do on the financial rate side.

Kevin Dede

Okay. Alright Chris, well thank you, thank you so much for offering the additional details, much appreciate it, and I, as always greatly respect you perspective on the industrial developments, so thanks for sharing that too.

Christopher Miglino

Thank very much. I appreciate it Kevin.

Operator

[Operator Instructions] There are no further questions at this time. I would like to turn the call back over to Mr. Haag for any closing comments.

Robert Haag

Okay thanks everyone and with that I’d like to conclude the Social Reality call. Thank you to all stockholders and stakeholders for their participation in today’s call and their support of the company. This concludes their first quarter 2016 conference call. Thank you very much. Bye, bye.

Operator

This concludes today’s conference. Thank you for your participation, you may disconnect your lines at this time and have a wonderful day.

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